What is market segmentation and is it crucial for your business?

Find out the definition marketing segmentation, how it is applied in a business context, how you can segment a market and gain a perspective of the historical and current iterations of marketing segmentation

For many years, marketing specialists have segmented their target customers to understand who might buy a service or product. It does sound pretty easy.

Yet, sometimes companies have fallen (and continue to fall) into a few pitfalls when thinking about segmentation. One is that they just don’t segment. Two, they confuse segmentation with demographics. And three, many companies forget to ask themselves why they want to segment and what decisions will be made based on the information they receive.

In other instances, firms focus on traditional segmentation while failing to consider major shifts in customer behaviour caused by the advance of Information Technology. So, for example, what demographic or geographic segmentation never did was identify what a person may have wanted other than a particular product (say juice). One step at a time, we will explain what market segmentation is, the process of market segmentation and why it is important for your business.

What is market segmentation?

Market segmentation refers to the classification of prospective consumer groups, in accordance with their needs and requirements and their tendencies to generate a similar response to a particular marketing action. Market segmentation is a useful marketing strategy through which businesses may divide a homogeneous consumer market of a sizable proportion into more defined segments, to be better able to understand the dynamics of their target consumers.

Related

Segmenting a market, simply put, is separating a group of customers belonging to the mass market into smaller groups of customers with similar needs and behaviours. In doing so, a company establishes a target for their marketing efforts (i.e., target market) and can, therefore, better customise its services and products to meet the target’s preferences.

Consider this example: the beverage market consists of people that are willing to purchase a liquid beverage to satisfy their thirst needs. While it would be simplistic to consider everyone in the world to have a thirst need, in reality, there is not a single commercial product that would satisfy everyone’s desire. Individual needs, tastes, price sensitivity and many other factors lead to differences in the ways people choose what to drink. Such differences and similarities are the key elements that for-profits or non-profits, industrial or consumer businesses should consider when orientating their marketing strategies and segmenting the market.

The purpose of segmentation is to learn as much as possible about the consumers and with this information begin to craft highly targeted marketing campaigns. Targeting a particular market does not mean excluding people who do not pertain to the criteria. Rather, learning as much as possible on specific people allows you to craft highly targeted marketing campaigns. This is a much more affordable, effective and efficient way to reach potential clients and generate revenues. Now that we’ve covered what Market segmentation is, let us dive into the three-stage process of segmenting our market: Segment, Target, Position.

Why does market segmentation matter?

As we mentioned at the beginning of the article, big data and technology have changed how companies approach segmentation. Technology revolves around universally cheap communication. The boundaries of availability for an infinite variety of products and services have expanded, and many products have been converted to a digital format.

Technology has also created a ‘two-way flow’ of information between customers and suppliers, enabling an entirely new set of customer behaviours and expectations around how, when and where they can buy and use products, and in what form. This isn’t necessarily bad news, rather over time, customer behaviours will be easier to cater thanks to the use of advanced analytics.

So, as the pool of customers’ personalities, needs, behaviours, etc. change over time, it is crucial that companies keep up the pace and consistently correct and revise their segments with new data on real behaviours. You will want information about which benefits and features matter to customers, and data on emerging social, economic and technological trends that may alter purchasing and usage patterns.

Effective segmentation need to be dynamic in two ways and need to be redrawn as soon as they lose their relevance. The first way is, they should concentrate on the needs and behaviours which are rapidly evolving, rather than personality traits, which frequently persist through a person’s life. The second way is that segments are being rapidly reshaped by technology, fluctuating economics, and new consumer niches.

If a company, business or firm ignores market segmentation and ignores their target customer, there is nothing to sell and nobody to sell to. A good market strategy and thus a proper segmentation can increase your competitiveness, brand recall, customer retention, communications and expand your market. In summary – Target the right segment, and you will walk away with a better company and higher profitability.

Advantages of market segmentation

Ultimately, market segmentation adds to a business’ ability to cater to diverse needs of a considerably sized consumer market, where various sections of consumers may have varied needs, interests and perceptions of different products and services.

Taking into consideration different conclusions derived through market segmentation, businesses can allocate their resources to develop a marketing mix in coherence with the demands and requirements of their target consumers. Market segmentation has evolved as an essential marketing component and today, it is utilised by businesses operating in different industries to fulfil various purposes and meet diversified marketing requirements.

Provides direction

Market segmentation is relied upon as an essential tool by businesses to help them with the identification of consumer segments that consist of their target customers. Hence, market segmentation provides a direction to the businesses for adopting a feasible marketing approach and developing a workable marketing strategy.

Value creation

As a result of market segmentation, businesses can develop a better understanding of the dynamics of smaller market segments, comprised of their target consumers, as well as that of a large consumer market as a whole. This helps businesses in making informed decisions with respect to the deliverance of their products or services, to their target consumers. Gaining insight into the perceptions and preferences of their target consumers, they are better able to project their offered goods and services as valuable entities for their consumer bases.

Competitive edge

Since market segmentation is considered as a facilitator towards the identification of specified consumer segments and their respective needs and requirements, as elaborated earlier, it helps businesses in offering their goods and services in accordance with the acknowledge consumer demands. Consequently, through market segmentation, businesses are better able to fulfil the needs and requirements of their target consumers and attain a competitive edge over others.

Disadvantages of market segmentation

Though market segmentation is one of the most acknowledged tools of marketing in the present times, still there are some shortcomings that entail the concept of market segmentation, and for that very reason, it is subjected to widespread criticism.

It is often suggested that market segmentation limits a business’ approach towards the identification of and interaction with target consumers. Hence, many point towards the possibility of businesses missing out on any potential consumers, who may not be a part of the identified consumer segments.

Objective approach and generalisation

Moreover, questions and concerns are raised about the viability of quantitative survey and analysis for market segmentation. Since quantitative studies are more objective in nature, it is possible that relying on quantitative data companies and businesses might not be able to gain some information that may relate to abstract concepts of human behaviour. Individuals essentially show diversity in characteristics and behaviour, and at times it may not be reasonable to generalise and subject a finding to a particular group of people.

Hence, it is argued that applications of market segmentation do not confer to the principles of diverse dynamics of a particular consumer segment and varying individual behaviour.

How to segment a market/markets

The very first step in segmentation consists of identifying variables through demographics (i.e., statistics that describe a population), geographics (i.e., location issues) and financial information. While a few years ago a marketer may have stopped at this stage, nowadays, the straight line that once linked a person’s demography or geography to their buying patterns may look like a crack in the windshield: an indirect path leading to various types of dead ends. How so? Because every experienced marketer knows that different customers buy for different reasons and different customers engage with a product or service in different ways.

Marketers should, in fact, use market research techniques tailored to finding out more about their target, for example, their purchase situation. They should investigate what circumstances within the customer’s environment could affect purchases and understand local conditions that could impact buying decisions.

Accordingly, segmentation consists of identifying variables through behaviours (i.e., knowledge of, attitude towards, and readiness to use a product.), psychographics (i.e., real people’s lifestyles, attitudes, self-image and aspirations), and culture. Most of these variables necessitate the marketer to analyse the customers in the market through primary research methods, like surveys, customer service, or hiring consultants to undertake research projects. Simply put: you will need data.

The advantage of deeper segmentation is likely to be competitive gains over rivalling companies whose segmentation efforts were more superficial. To get access to such information marketers must be aware that they will spend a surprising amount of resources and time to collect data which customers are sometimes not so keen to share (Qualitative research is preferable because it showcases real stories that are the key to convincing stakeholders).

Whichever approach you take to gain relevant data and segment your market, segments should be fashioned according to the following six characteristics: Identifiable, substantial, accessible, stable, differentiable and actionable.

Identifiable means you should be able to identify and measure customers’ characteristics, like demographics or usage behaviour.

Substantial entails a large enough segment to be potentially profitable.

Accessible means it should be reached via communication and distribution channels.

A stable segment is one which can be strategically marketed over a long period of time. For example, psychographics may not be wise to use globally because people’s lifestyles are dynamic and constantly evolving.

Differentiable. The targets in a segment should have similar needs that are clearly different from the needs of people in other segments.

Actionable means you have to be able to provide products or services to your segments.

To wrap it up: when segmenting your market, make sure you are asking yourself if you have targeted all those potential customers that fit into the segment, whether you understand your target fully, if your target will benefit from your products and services and if they can afford them, and if your idea, product or service is easily accessible. Now all your business needs is marketing objectives and a plan.

Target marketing strategy

Next you need to devise a marketing strategy. Given the current state of the economy, devoting time and resources to identify more targeted markets can help you maximise your marketing strategy. This process – knowing when and to whom to market your product or service – can result in much higher rates of return. No one can afford to target everyone. Small businesses can effectively compete with large companies by targeting a niche market. With a clearly defined target audience, it is much easier to determine where and how to market your company.

Here are some tips to identifying a good marketing strategy. The first tip is that there isn’t a single strategy to suit all consumer groups, so coming up with tailored strategies for your target markets is crucial. The second tip is to perform a cost-benefit analysis of all available strategies before selecting a particular targeting approach, so you know which best suits your firm. There are four general strategies for choosing your target market/s:
(Market Analysis)

Undifferentiated or Mass Targeting:

With this strategy, the marketing team views the market as one group using a single marketing strategy. As we mentioned earlier, however, while this approach might have been appealing in the initial days of marketing when Ford introduced his Model-T, a limited number of businesses now view it as a feasible strategy.

Concentrated or Niche Targeting:

This approach combines mass and segmentation marketing by focusing on a particular market niche on which marketing efforts are targeted. It is primarily used by small firms which have identified a narrower sub-target of a larger segment that is not served by larger firms. This strategy often allows the former to benefit, as focusing on one segment enables them to compete effectively against larger firms.

Differentiated or Multi-Segment Targeting:

This strategy is used by marketers to target multiple markets using a unique marketing strategy for each. Multi-segment targeting mainly offers benefits to large consumer product firms that offer multiple products (e.g., soccer shoes and baseball shoes) within a wider product category (e.g., footwear).

Customised or Micro-Marketing

This newest target marketing approach, catalysed by the Internet, is generally used to attract targeted customers with individualised marketing programs. For micro-marketing segmentation to be effective, the marketer must, to some degree, allow customers to “build-their-own” products. As more companies learn to utilise the internet, micro-marketing is expected to flourish.

Step 3. Positioning

No matter which marketing strategy is selected, the overall marketing strategy should involve the process of positioning the firm’s outputs in ways that will appeal to targeted customers. Positioning is the process by which you position a market, product or service and communicate the benefits to potential clients with the goal of convincing them to believe such outputs are better than those of the competitors.

For instance, if a customer has discovered they have a need for an affordable laptop computer, a company such as Dell may come to mind since their marketing efforts position their products as offering good value at a reasonable cost. When you start coming up with the factors that will communicate your position, they must all tie-in to the positioning approach to maximise its effectiveness. Otherwise, your marketing campaign won’t own the idea in the mind of the targeted customer, and your positioning won’t have the desired effects.

To position successfully, you must have a thorough knowledge of the key benefits sought after by the market and thus know what your customer actually wants to buy from you, how your product stands out among those of your competitors, and the reasons your product or service is unique.

Once you have a clear view of these strategic aspects, you can begin to develop a positioning strategy for your business plan that will include a description of the target market, how it will be reached, the product that is being bought, who the competitors are, and what your unique selling proposition is. And when you have done your homework regarding segmentation, you will know the benefits wanted by the market and therefore the overall market strategy can be evaluated for each target market more smoothly.

A history of market segmentation

Market segmentation finds its roots in the marketing practices of the 1950s. It was identified and incorporated in the marketing endeavours during that era, as its importance was recognised by various business circles. Ever since then, market segmentation has only grown in importance and popularity and today, it is one of the most researched disciplines of marketing.

Market segmentation is as important for marketing success in the present times, as it had been at the time of its birth, during the late 1950s, particularly in industrialised nations. Since businesses have come to realise the importance of modifying their products and services in accordance with consumer requirements and preferences, and the need to identify the needs of their specified consumer bases amid the vast heterogeneity of broad consumer markets, markets segmentation has evolved to be recognised as one of the rudimentary principles for the adoption of various marketing approaches.

Industrial revolution and development

Perhaps, the need for market segmentation was first felt as a consequence of the diversity of good and products, that was a result of industrial development. It was during the early twentieth century that marketing segmentation gained a prominent position and was formally acknowledged as an essential marketing component, in the wake of increasing efficiency of mass production and diversity of goods and products.

Surely, industrial revolution and development had had a significant impact on marketing concepts, and philosophies and marketing strategies became more centred on manufacturing, focusing on the applications that were to minimise production cost, with marginal importance being devoted towards consumer satisfaction.

Though, later the with the advancements made with respect to the flexibility of production methods and the diversification of consumer demands, businesses began to shift their focus towards the identification of requirements and demands of particular market segments. Those businesses which focused on meeting the demands of smaller consumer segments were better able to gauge consumer requirements and preferences and resultantly, their marketing approaches rendered fruitful results, providing them with a competitive edge over others.

Early developments and theories

It was Chamberlain who first directed attention towards the importance of focusing on consumer needs than business requirements for entrepreneurial success. The subject was further elaborated by Robinson in his ‘Economic Theory of Imperfect Competition’. These theories and speculations were what prompted Smith to highlight the importance of market segmentation and discuss the heterogeneity of consumer demand, in 1956.

It was much later in 1974, that Wind and Cardozo presented a more structured definition of consumer segments, in the article ‘Industrial Market Segmentation’. They defined consumer segment as a sub-group of consumers sharing similar requirements and showing tendencies to respond in a similar manner to a market stimuli.

Since then, various experts have highlighted the importance of market segmentation as an effective way to deliver products and services, according to the needs and requirements of the target consumers.

Role of market segmentation in the present era

Today, market segmentation is widely practised as a part of effective marketing endeavours. Modern marketing theories and practices include market segmentation as an elementary and essential component.

Elementary marketing tool

Over time, market segmentation has been recognised as one of the most effective tools for ensuring marketing success. Presently, various companies and businesses rely on market segmentation to exploit diverse marketing opportunities to the most of their advantage and make optimum use of all the resources available to them. Moreover, the modern description of market segmentation also explains it as a fundamental tool that is required for coping up with the intense and increasing market competition.

Businesses rely on market segmentation to gain valuable data and input about consumer needs, requirements, preferences and behaviours and hence their confidence in their ability to adequately cope up with the growing competition which has increased manifolds.

Market penetration

Today market segmentation is considered as an effective tool by businesses to enhance their interaction with the target consumer and focus on the allocation of their resources to increase their marketing efficiencies concerning particularly identified smaller consumer segments.

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Market segmentation is now acknowledged as a vital factor that paves the way for market penetration. As it allows businesses to identify the consumer pulse and helps them in developing a profound understanding of their consumers’ needs it serves as an essential factor that leads to market penetration.